Services Science: An Open Innovation perspective on studying innovation in services

1. Services Science:An Open Innovation perspective on studying innovation in services Henry Chesbrough Executive Director Center for Open Innovation, IMIO Haas School of Business

2. The Current Paradigm: A Closed Innovation System Science & Technology Base The Market Research Investigations Development New Products /Services R D

3. The Open Innovation Paradigm Other Firm’s Market Licensing Internal Technology Base Technology Spin-offs New Market Current Market External Technology Base Technology Insourcing R D

4. Open innovation Licence, spin out, divest Internal technology base Internal/external venture handling External technology insourcing External technology base Closed innovation Other firm´s market Our new market Our current market Stolen with pride from Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis Sept 27, 2004

5. IBM’s Business Model, Before All IBM – pre 1993

6. IBM’s Business Model - After

7. IBM & Open Innovation Other Firm’s Market $1.9 B licensing, OEM for semi co’s ODM for others Internal Technology Base New Market Current Market External Technology Base Global Svcs Sun, and others’ eqmt Java, Linux Technology Insourcing R D

8. Is this just for High Tech?Procter &Gamble Other Firm’s Market “Use it or Lose it” Internal Technology Base New Market Current Market External Technology Base Large Acquisitions “L’Oreal” Venture Acquisitions “Spinbrush” Technology Scouts R D

9. Intermediaries & Open Innovation Other Firm’s Market IP Value - licensing NVPLLC: spinoffs Internal Technology Base New Market Current Market External Technology Base Investment Banks Sequoia/ Cisco InnoCentive NineSigma Yet2.com Technology Insourcing R D

10. The State of Play in Services Industries Today • In many leading companies, services are more than half of the company’s revenue, and usually the fastest growing part • IBM, GE, Xerox, GM • Yet companies who sell services innovation offerings to corporate and government clients admit they lack a powerful conceptual model underneath their offerings • “Best practices”, separated into vertical markets • The shoemaker’s children are barefoot • Paul Horn’s problem at IBM circa 2002: $6 billion of R&D, but little of that money is advancing the services portion of IBM’s business

11. The Impact of Academic Research on Industrial Performance • National Academy of Engineering Study (2003): 5 sectors • Networking and Communications • Medical Devices and Equipment • Aerospace • Financial Services • Transportation

12. The Impact of Academic Research on Industrial Performance Product • National Academy of Engineering Study (2003): 5 sectors • Networking and Communications • Medical Devices and Equipment • Aerospace • Financial Services • Transportation • Found significant impact from academia on the first three, and much more limited impact on the last two sectors • “…the academic research enterprise has not focused on or been organized to meet the needs of service businesses” (p.8) • DARPA gives more to consultants than academia in services • NSF funding structure badly lags industry evolution • Yet long term university-sited research is vital to long term industrial innovation performance Service

13. The Productivity Paradox: Eric Brynjolfsson • “We see the benefit of IT investment everywhere, except in the statistics”: Robert Solow • Brynjolfsson’s Research Program resolved the productivity paradox • Partly a measurement problem • Partly a management problem: Companies greatly improved their productivity with IT spending, but only when they deployed new business processes to exploit that IT investment • (adding IT investment to legacy processes did NOT increase productivity) • Research Implication: one cannot understand productivity increase without developing a deep understanding of the underlying business processes

14. A Stylized View of Services Practice Today Government Education Health Care Financial Services Transport • Deep domain expertise • But little or no sharing across domains

15. A Stylized View of Computer Architecture Today User Interface, Identity Management Applications Middleware, Meta-data Operating Systems, Networking Systems and Peripherals Chips, Components • Formerly vertically integrated functional stacks now horizontal • Broad sharing across many different domains of use • Creative fusion hybridizing many domains of use

16. Robert Glushko’s Model of IT-Enabled Business Models Strategic/Policy Issues Business Processes Information/Data Structure Physical Model Implemented Model Conceptual Model

17. Challenges in Designing and Managing Business Models Strategic/Policy Top Mgmt How to connect? Business Process IT Mgrs Information/Data Structure Physical Model Implemented Model Conceptual Model

18. Challenges in Designing and Managing Business Models Strategic/Policy Top Mgmt • How to connect? • Focus on processes • Create tools • Only feasible strategies • considered Business Process IT Mgrs Information/Data Structure Physical Model Implemented Model Conceptual Model

19. Modeling Services Exchange Between Customer and Supplier Shared Data Customer Supplier

20. Modeling Services Exchange Between Customer and Supplier Linked Processes Shared Data Customer Supplier

21. Modeling Services Exchange Between Customer and Supplier Coordinated Business Models Linked Processes Shared Data Customer Supplier

22. Other Considerations in Managing Innovation in Services • Modularity and systems architecture • When to re-use modules vs. use custom designs • Limits to modularity • Systems integration • Managing tacit information in innovation processes • Easier to engineer codified knowledge • How to elicit tacit dimensions of knowledge? • Managing multiple business models within a single organization

23. Why This Might Be the Right Time for Services Science • Major advances in IT, and how to implement business processes • Industry “gets it” – that we need new concepts for how to innovate in services • Services innovation needed to support long term growth in workforce that is now 70%+ devoted to services

24. Why It Might NOT Be the Right Time • No institutional support for services innovation research within academia • We are all in our siloes • Academia is constructed not to change • No institutional funding for services innovation research • NSF has no category for funding! • No shared conferences, no shared journals, no shared sense of the key research challenges